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Relating to dividends, insurer Phoenix Group (LSE: PHNX) is without doubt one of the massive beasts within the FTSE 100. Its mammoth 9.9% dividend makes it among the many most profitable FTSE 100 dividend shares. Relating to share worth motion, although, Phoenix is extra underwhelming.
Over the previous 5 years, for instance, it has moved up simply 3% — but throughout that interval, the FTSE 100 index has soared 55%.
5 years in the past the market was nonetheless in the midst of pandemic turmoil and which may be an element within the hole. However even over a one-year timeframe, the Phoenix share worth has underperformed relative to the index. Phoenix has fallen 1% prior to now 12 months, whereas the FTSE 100 has moved up 5%.
What’s going on – and would possibly it nonetheless make sense for an investor to contemplate Phoenix regardless of its underwhelming share worth efficiency?
A excessive dividend might be engaging, but additionally scary
Maybe counterintuitively, I feel a part of the problem for Phoenix might really be its dividend.
That will sound odd, however when an organization has a excessive yield, it could generally make traders fearful about how doubtless the payout is to be maintained.
M&G, for instance, has a ten.5% yield and final month introduced the newest improve in its annual dividend per share, but the M&G share worth is down 10% over the previous yr.
Nonetheless, it’s up 74% over 5 years. Once more although, I feel which will merely mirror a pandemic-era baseline. Going barely additional again, to M&G’s itemizing in 2019, the efficiency up to now has been a 15% share worth fall regardless of a constantly excessive dividend yield.
Within the case of Phoenix, I feel the mixture of a enterprise seeming fairly boring (as insurance coverage can do) with being obscure has additionally constrained investor enthusiasm for the inventory.
Phoenix might be a high-yield discount
Nonetheless, whereas some shares don’t excite traders, cash tends to speak. If Phoenix has robust potential as a enterprise, why has its share worth carried out weakly over time even whereas the agency continues handy out beneficiant dividends?
There are dangers right here that might present some rationalization. Lengthy-term valuation assumptions in regards to the kinds of insurance policies housed on Phoenix’s books might be challenged by unexpected actions within the financial system, for instance. So a enterprise that appears worthwhile for a few years can abruptly begin making far much less cash than anticipated because the financial system shifts.
However whereas income are an accounting idea, money flows present the laborious, chilly money a enterprise is producing.
Final yr, Phoenix’s working capital era was £1.4bn. It achieved that degree two years forward of schedule. It now expects working capital era to develop by mid-to-high single-digits yearly, in proportion phrases.
If it could obtain that, the dividend seems comfortably safe to me. Phoenix’s progressive dividend technique foresees annual development within the dividend per share, though no dividend is ever assured.
For that degree of working capital era, the market capitalisation of £5.4bn seems low to me.
Over the medium-to-long time period, I might anticipate strong enterprise efficiency might justify the next share worth for Phoenix. On prime of that, I reckon the excessive yield makes this a share traders ought to contemplate.
